The new governor of Illinois has emerged as a passionate advocate of sports betting and that has inspired Churchill Downs to snap up the state’s largest casino.

Governor J.B. Pritzker has gaping holes in his budget to plug and he believes sports wagering could help solve the state’s fiscal problems. He is so confident of it being legalized in Illinois that he has earmarked an ambitious $200 million from fees and revenue taxes on sportsbooks in his 2020 budget.

Churchill Downs responded by putting forward a proposal to acquire 62% of Rivers Casino in Des Plaines, and Illinois Gaming Board members gave it the green light.

Louisville-based Churchill Downs, which owns Arlington Park in Chicago, will pay $407 million in cash for the majority stake in Rivers. In 2018, the casino generated revenue of $422 million and Churchill Downs chief executive Bill Carstanjen called it “a real gem” and one of the most dynamic, successful casinos in the country.

However, the bigger prize will undoubtedly be statewide mobile sports wagering, and ownership of Rivers gives Churchill Downs a strong foothold from which to launch retail and online operations in Illinois.

Obstacles Remain for Illinois Sports Betting

The road towards legalization still looks long and bumpy from here on out despite Pritzker’s confidence.

Past efforts to legalize sports betting in IL have been met with enough resistance to half progress to date. Bills introduced by Sen. Napoleon Harris III and Rep. Bob Rita last year ended up going nowhere amid ongoing debate over the shape the industry should take.

Nevertheless, Napoleon Harris III is back at it again this year with SB 1076. His bill seeks to authorize Illinois casinos to offer retail and online sports betting. Under the bill, sportsbook would pay taxes of 12.5% on gross revenue.

His latest bill may also run into problems as it includes the contentious “integrity fee,” which would give sports leagues a large chunk of operators’ revenue. While sports leagues are all-aboard on integrity fees, would-be sports betting operators are not. The integrity fee issue has proven quite controversial in other states and could be enough to derail this effort as well.

However, Pritzker does have an important ally in Rep. Mike Zalewski, the chairman of the House Committee on Finance and Revenue. The Chicago Tribune reports Zalewski is working with Rita on a sports betting bill may stand a greater likelihood of passing.

Zalewski is conducting hearings this month and he hopes to have something on the new governor’s desk by May. He aims to have sports wagering up and running by the end of the year, although he admits there are plenty of obstacles that need to be cleared between now and then.

Budget Proposal Slammed

Ratings agencies have poured scorn on Pritzker’s budget, which also includes $170 million from a tax on recreational cannabis sales in 2020. Neither sports wagering nor adult-use marijuana are legal yet, and the likes of S&P and Fitch said his budget is too reliant on them passing into law.

Agencies have warned the state it faces another debt downgrade if Pritzker’s budget is approved, increasing the risk of being plunged into junk status. S&P said implementation of legal sports betting could take longer than anticipated and that the budget relies on “uncertain revenues and lingering structural imbalance is status quo.”

Mimicking the Pennsylvania Model?

Zalewski generally favors lower taxes, like those implemented by New Jersey. However, Pritzker is aiming for a 20% revenue tax, which would be the second highest tax in the US after Pennsylvania.

The governor also wants to follow the Pennsylvania model by charging operators an eye-watering $10 million up-front licensing fee to run sportsbooks. His demands are understandable given the shortfall in his budget, but critics say this approach stifles growth of the sports betting industry and discourages competition by making it difficult if not impossible for smaller operators to enter the market.

Neighboring New Jersey does not charge a fee and its tax rate is just 13% for online sports betting and 8.5% for retail sportsbooks. Nevada charges a 6.5% sports betting tax, while West Virginia’s rate is just 10%.

However, Pritzker can take plenty of encouragement from developments in Pennsylvania. Operators in the Keystone State lobbied hard for legislators to reduce their demands for a $10 million licensing fee and a 36% tax on revenue.

Operators argued the sky-high demands would form an impediment to the roll out of sports betting in the state, preventing it from making much revenue on taxes, if any. William Hill warned at one point that it would shun the state due to its ambitious demands, while Penn National said they were the highest in the world and made it impossible for operators to make any return on the investment of capital.

However, the state stuck to its guns and held firm, confident that once a single operator buckled the others would fall like dominos. In the end, Penn National was the first to cave as it applied to run sports betting at its Hollywood Casino in the state.

Greenwood Gaming swiftly followed suit, and that sparked Caesars into action as it applied for Harrah’s Philadelphia to launch a sportsbook, while Rush Street Gaming joined the party with licenses for SugarHouse Casino in Philly and Rivers Casino in Pittsburgh.

Sportsbooks across Pennsylvania are all now up and running, with Greenwood Gaming opening sportsbooks at Parx Casino in Bensalem and its South Philly Turf Club. Mobile sports betting is set to launch soon and that too will boost revenue for operators.

A Compelling Case for Illinois Operators

Those in Illinois looking for big licensing fees and high tax rates can take some heart from the events in Pennsylvania. In PA’s game of high stakes chicken, the state clearly won with most of the state’s casinos choosing to apply for sports betting licenses.

Additionally, other factors may offer a further advantage should it choose to go down the high-fee, high-tax path.

Churchill Downs, for example, is unlikely to balk at demands for a $10 million licensing fee after investing $407 million in acquiring Rivers Casino. A Churchill Downs decision to apply for a sports betting license in Illinois would most likely spark rivals to action and from there an industry would form just as it has in Pennsylvania.

Once one operator applies for sports betting, the other will not want to be left out of the party. Even if casinos do not typically earn a ton from the low-margin business of sports betting, they still benefit from increased foot traffic to their properties. This in turn leads to more food and beverage sales in addition to more traffic to their higher-margin games.

On top of all that, legal mobile betting would allow casinos to target potential customers across the state. Put it all together and the case for coughing up a large licensing fee starts to look quite compelling.

Illinois represents a major prize for the nascent US sports betting industry. It is the sixth-largest state by population and the fifth largest by GDP, putting it broadly in line with Pennsylvania.

Still, operators are likely to argue the case for a similar model to that adopted in New Jersey. While Pennsylvania’s sports betting handle hit a respectable $32 million in January, New Jersey crushed that over the same period with $385 million in handle.

The comparison may be a bit unfair due to the New Jersey market being more mature, having online betting in place and more active operators, but still it goes to show that a low tax, low licensing fee model is extremely conducive to a healthy industry. It also goes to show that lower taxes may indeed raise more revenue for the state than excessive taxes.

Even so, Pritzker is looking to the short-term and he is bound to press for as high a tax as possible in order to tackle the state’s pension debt, reduce the backlog of bills and improve the crumbling education system. There will likely be plenty of operators willing to meet the state’s demands, as Illinois has a high GDP and an abundance of sports fans concentrated around the Chicago area.

A stake in DraftKings will give Caesars firmer footing in Illinois through the highly-visible DraftKings name in addition to getting a cut of the revenue DraftKings makes in the states where Caesars has casinos. In return, DraftKings will be able to launch online and retail sportsbooks on the backs of those casinos.

Caesars is very much present in Illinois, and that could make DraftKings a force to be reckoned with in the state. It is interesting to see North American operators fighting back against the dominance of their European counterparts. In announcing its 2018 results this week, British bookmaking giant William Hill declared that it has a 34% market share of the US sports betting industry.

Paddy Power Betfair is also making surging gains after acquiring FanDuel, which is performing very well in New Jersey. With Caesars’ backing, DraftKings can continue to rival FanDuel, while the arrival of Churchill Downs in Illinois looks fascinating as it can bring a wealth of experience and brand loyalty to the table.